Q4 2020 Evans Bancorp Inc Earnings Call
Yeah.
Greetings and welcome to the Evans Bancorp fourth quarter, and full year, 'twenty and 'twenty financial results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference.
Please press Star Zero and your telephone keypad as a reminder, this conference is being reported have now I'd like to turn the conference over to your host and Investor Relations for Evans Bancorp Deborah Pawlowski.
Thank you Omar and good afternoon, everyone and we certainly appreciate your taking the time today to join Us and your interest and Evans Bancorp.
On the call, we have David Nasca, our President and Chief Executive Officer, and John Hartman, Our Chief Financial Officer, David and John will review the results of the fourth quarter and full year 'twenty and 'twenty and then we will open up the call for questions.
You should have a copy of the financial results that were released today. After the market close if not you can access them on our website at Www Dot Evans Banc dotcom.
And you are aware, we may make some forward looking statements during the formal presentation as well as during the Q&A. Please.
These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ from what is stated on today's call.
These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission you can find those documents as well on our website or at SEC Gov.
With that let me turn it over to David to begin.
Moving.
Thank you Debbie good afternoon, everyone. We appreciate you joining us for the call today.
And it goes without saying 'twenty and 'twenty was a singer a year. Unlike any other with monumental upheaval that tested the fortitude and resiliency of our organization.
And I'm most proud of what our entire Evans team achieved we responded rapidly to support the people and businesses and our region to help them navigate the many challenges presented by the pandemic.
At the outset of this disruption we quickly adjusted to a new remote work posture to protect our associates clients and the community in fact by the end of last March we had over 96% of our non branch staff working remotely.
Well, we have had some reintroduction to the office environment, we are predominantly operating in a remote stance and we'll through at least this spring.
Given the multiple changes to guidelines for operating safely. The retail delivery channel has also seen significant impact alternating between branches being drive through mobile and a T M only to being open with appointments only to being fully open with safety protocols and equipment.
Facilitate business and continue to serve clients a number of new processes and technologies were employed throughout the bank as well as new customer facing tools such as online document signing and then commercial lending platform tools secured communication platforms and paycheck protection program bulk applications submitted.
Mission software to name a few.
From an industry perspective intense pressure was put on net interest margins as the fed lowered rates to near zero percent to address business challenges and shutdowns occurring as a result of the pandemic.
Liquidity flooded the system due to P. P P and there were few opportunities to redeploy profitably.
In addition industry wide income was negatively impacted in a material way and at the holding a significant reserves in response to macroeconomic trends and concerns, including unemployment reduce spending and business slowing to levels never before seen.
During the year, while COVID-19 significantly impacted the financial industry and operations, we were able to pursue execution of our strategy through the flexible and committed efforts of our team to position the company for long term growth. This included a number of significant achievements.
Yes.
We extended and bolstered our market presence and the Rochester market by successfully closing and integrating the acquisition of $322 million of asset Fairport savings bank the.
And the acquisition help scale, our mortgage operation by quadrupling production volumes and strengthening operating plant firms during one of the hottest markets for home financing and history.
The integration of employee benefits brokers of Western New York occurred very early in the year. After closing on December 31, 2019. This will provide complementary fee income and business to our insurance agency.
During the year, we closed 1933 P P P loans totaling $203 million.
Which were originated and closed during this year.
Evans was the only bank and our market and accepted applications from all clients and non clients without pause. This resulted in a bank transacting with approximately 900, new to bank prospects effectively doubling the size of the commercial borrowing portfolio and approximately 45 days.
Subordinated debt was Opportunistically raised mid year is a lower cost source Tad capital after the FSB acquisition and provide additional strength against business uncertainties.
Additionally, construction was completed and our new administrative headquarters technology enhancements were incorporated the move was accomplished combining occupants of three facilities into one and our former administrative facility was sold at a gain.
Equally important important where our actions in support of our core values paint.
Payment deferrals were provided to commercial and consumer.
Borrowing clients to assist their cash flow and address possible rent or mortgage holidays, we suspended fee income for services and served as a conduit to government stimulus as originators of SBA guaranteed PPP loans, while trying to address ever change and governmental regulation.
So several community grants were given including to two Buffalo area Charter schools that Evans supports these funds assisted and changes needed to respond to COVID-19, including the addition of a part time school nurse and virtual curriculum support additional donations were made to charities fighting food and security is.
<unk> by the pandemic and economic fallout and our communities.
Our new financial Fitness initiative was launched and partnerships established to enhance financial proficiency and the communities we serve.
And New Bank branch office in Westminster Commons, a low income senior housing project financed by the bank located in and underserved market within our footprint was approved and is expected to open and the first half of 'twenty 'twenty one and.
And amid political division and ratio unrest, we refocused and enhanced our diversity equity and inclusion efforts.
Our national consulting was brought in to facilitate discussions with associates and the board of directors and concerns related to racial and equity and unrest and our communities as well as help solidify Evans position as a community participant in the dialogue around these issues.
Our review and needs assessment work completed along with insights and recommendations for a path forward that our D. I steering committee is leading.
To wrap up 'twenty and 'twenty was an incredibly challenging year, but it also showcase the bank's agility and resilience tremendous credit goes to all our associates and management, who soldier through and showed outstanding grit, and and impossibly difficult and chaotic environment as.
As we look to the new year, we are optimistic that the pockets of recovery within our markets will continue to strengthen and the building developments with vaccination can return the country to a more normal state.
Even as our world continues to operate and drastically changed environment, we are positioned to assist and take advantage of the opportunities ahead with that I'll hand, it over to John to run through our results and then we'll be happy to take any questions John.
Thank you David and good afternoon, everyone.
Net income was $6 million from $1 11 per diluted share and the fourth quarter compared with $3 7 million or <unk> 75 per diluted share and last year's period.
The increase reflected higher net interest income largely due to the FSB acquisition and fees earned in connection with PPP lending.
Net income also increased over the trailing third quarter as the period had and elevated loan loss provision to reserve for well defined weakness and the hotel portfolio and contain remaining merger related costs.
Net interest income increased 789000, or 5% from the third quarter of 2020, and $3 6 million or 28% from the prior year fourth quarter.
The increase from the sequential third quarter resulted from an acceleration of the amortization of PPP loan fees as we recognized the first PPP loans to be forgiven by the federal government.
This acceleration resulted in approximately $400000 of additional income during the quarter.
We did release, a 126000 of allowance and the quarter largely as a response to current positive macroeconomic trends such as unemployment.
Net interest margin improved to 338% and the fourth quarter up 19 basis points over the linked period largely due to the accelerated PPP fee amortization and reduced interest expense as we continued to reduce rates on certain deposits.
The 29 basis points decline from last year's fourth quarter reflects the federal reserve's decrease of the federal funds rate by 150 basis points early in 2020, and changes and the mix of interest, earning assets, including greater interest, earning cash interest, earning cash balances PPP loans and residential mortgages from FSP.
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We have a strong commercial pipeline and the first quarter of 2021 and and and Additionally, as of today have received 544 second round PPP applications amounting to approximately $64 million.
Both these sources of originations should result in continued expansion of our margin between five and eight basis points over the next couple of quarters as excess cash is deployed into higher interest earning assets.
However, there may be some variability as the margin will be dependent on the speed up forgiveness for the first round of PPP loans, which can accelerate or slow the amortization of the related fees, we expect 90% of the remaining $4 $6 million and deferred PPP fees to be amortized. This year as forgiveness is recognized.
Noninterest income for the quarter of $4 8 million increased about $800000 from last year's period, largely driven by the gain on sale of our former administrative headquarters, which was approximately $600000 and can be found and the other income line.
Noninterest income was down $1 $1 million from the linked quarter largely due to the seasonality within our insurance business.
The addition of FSB impacted a number of noninterest expense line items, this quarter, including higher salaries and benefits advertising and technology costs and of note. We had no merger related expenses and the fourth quarter of 2020.
S D ice FDIC insurance expense increased as a result of growth and assets and the reduction and the prior year's expenses due to the application of the FDIC small bank assessment credit, which was not applicable in 2020.
Uh huh.
Company also made adjustments for incentive accruals to recognize contributions of associates during the challenging environment in 2020.
The effective tax rate for the quarter was 12%, which reflects the historic tax credit transaction completed in the first quarter of 2020.
<unk> and the tax credit the rate was 22, 1%.
At this time, we do not anticipate additional historic tax credit transactions. After this year.
Turning to the balance sheet, the loan portfolio increased $467 million or 38% compared with last year's fourth quarter, which reflects $271 million from FSB and $203 million from PPP.
Compared with the linked 2019 and third quarter loans declined slightly mostly.
Sorry, compared with the linked 2023rd quarter loans declined slightly mostly due to PPP loan forgiveness.
We continue to have confidence and the overall credit quality of our portfolio.
Quarterly charge offs were one basis point and our allowance to loan ratio was 121%.
We did see nonperforming loans pick up which was centered on two hotel credits as we discussed last quarter. Our focus has been on the hotel portfolio, which was all moved to criticized status. While the majority continuing to pay either interest only or full principal and interest as part of our ongoing reviews. We did identify these two credits as having longer term issues.
Beyond typical seasonality.
Since moving the hotel portfolio and our criticized assets during the third quarter, New appraisals have been completed for a majority of those loans and recent market valuations have decline and the current economic environment. However, the hotel portfolio continues to be well collateralized with an average loan to value of 67% and we believe that we are appropriately reserved.
Total deposits of $1 8 billion grew 40% or 504 million since the end of last year. The increase was driven by FSP, which added $239 million of deposits and heightened liquidity levels of commercial customers, including deposits related to PPP loans increases and consumer deposits from government stimulus payments as.
Well slower consumer spending.
Seasonally lowered municipal deposits account for the slight deposits declined since the linked third quarter.
Looking ahead, we believe that we are well capitalized and have financial flexibility to weather any potential near term headwinds, while being and a strong position to fund future balance sheet growth.
That concludes my comments. So we now we will open the line for questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue from participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for <unk>.
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Okay.
And our first question comes from Alex toward Hall with Piper Sandler. Please state your question.
Hey, good afternoon guys.
Good afternoon, and Alex Hello, Alex.
First off just wanted to talk.
Talk about expenses for a minute and I know, there's some stuff from the FSB acquisition that and you've cited some higher incentive compensation and the <unk>.
<unk> line for the fourth quarter, but.
And maybe just give us help us get a sense for how much of the fourth quarter might've been inflated by some of the higher incentive comp and sort of what the right. Starting point is for 2021 would be very helpful. Thanks.
Sure I think the big impact.
On the expense line is and the salaries and comparing the $9 million or so for the fourth quarter versus the linked quarter of $8 million. It's really the impact there is the third quarter was depressed from the because we took a benefit and third quarter by adjusting down the incentives and then and the fourth quarter, we actually had it more.
Typical incentive period, because what we did and the third quarter is as we went through the year was evident that we weren't going to make our bonus as it was calculated but then and then and the fourth quarter management working with the board determined that with the efforts that were made we would adjust back up. So there was a timing timeframe. So the run rate of the fourth quarters.
And as more of the.
Appropriate run rate of around $9 million.
Understood is there anything else.
And the fourth quarter that might not be.
Super obvious and expenses that won't recur in 2021, and then also just in terms of cost saves and things like that and synergies from the from the transaction and are they all at this point recognized and.
And reflected and the expense run rate and yes, I think the remaining.
I think the run rate in the fourth quarter is pretty indicative of our operating run rate that's going to be going forward I mean, there'll be obviously and first quarter will have some increases due to merit increases that we typically have every year.
But I think the expenses and the cost saves that we have are baked.
Understood. Thank you and then in terms of the PPP just for my.
And by notes here.
The amount that was actually forgiven in the fourth quarter I'm not sure I saw that and the press release can you just tell us what that was.
Sure It was $17 million.
Whereas it's forgiven and the fourth quarter.
Okay, and then maybe you can talk David a little bit about the loan pipelines I know you mentioned that the commercial pipelines were strong and the first quarter of the year do you expect that to translate to net commercial and loan growth and the first couple of quarters that ex PPP or are you seeing the P. P. P. Cannibalize some of the loan growth that you normally would have put on.
Earlier in the year.
Let me say it this way.
Optimistic that that pipeline is indicative of better growth going forward.
Don't think the PPP will cannibalize that growth.
When I was talking to the lending guidance one of the and girls one of the things I said was.
Last year when PPP started that was all that was going on this year, we got a regular day job going on as well. So I don't think that there's cannibalization that is going to happen or are shutdown. There I think there's people that have held off as long as they can and there is a need to do their business here going forward. So Alec.
And just add just to add to that I think.
Our our pipeline right.
Be indicative of growth as David said, obviously.
Caveat and that if roll off and Refis are.
Continue on from from last year that it might be somewhat muting the growth that we would see based on the pipeline originations that we have and in house, but.
We think just the originations and themselves would be indicative of historical growth.
Great.
And then just final question from me.
On the margin and if you can just the 5% to eight basis points that you cited of expansion and the next couple of quarters is that kind of the all in margin inclusive of all the PPP forgiveness accelerated forgiveness fees and things like that and then you know.
If you kind of take the PPP acceleration away.
Do you think the margin and NII is set up over the next couple of quarters, just given sort of what you're seeing on new loan rates and opportunities.
Just at a lower cost of deposits and liabilities et cetera.
Sure.
I think probably half of that.
That is those that acceleration is baked into and to my estimate of where we think we're going to be going and I would say half of it is half of that benefit is more than half is due to the accelerated fees.
But otherwise I would say as our our core net interest margin excluding PPP.
Fees are is stabilized to slightly up.
Great. Thanks for taking my questions.
All right Alex.
As a reminder, if you'd like to ask a question press star one on your telephone keypad.
And our next question comes from Bryce Rowe with Hof deed.
Hi, Thank you good afternoon, it's good to talk to you.
Hey, Brian.
Hi, just wanted to maybe talk a little bit more about about the P. P. P and certainly appreciate some of the.
The commentary you gave around that so.
And you said that you expect the forgiveness of I guess round one.
90% to occur. This year can you can you give us a sense for kind of what you've seen here.
So far and 2021 in terms of that pace.
And is there a is there some some chance that potentially.
The pace of forgiveness may maybe a bit faster than what we.
And what you forecasted here.
Brian I'm going to start with this is Dave NASCAR, and then I'm going to let John get more technical I don't want to be too wonky, but we amortize those fees and income over the expected life of the loans. So there was an expectation of those coming back and a fairly level right and those.
Those are in there what we've seen and the first quarter and while the first quarter were in February 4th here, but what we've seen thus far is a little bit of a.
I'll hold and acceleration right now as people are coming in for their second round of PPP for example, so our.
Attention to folks or the their attention to getting forgiven right now when they have time to do that has maybe been diminished as they've focused on getting their second draw.
And to say so that's the.
Hi, and walking us of it and I'll let.
And you wanted more detail John can provide a little more and then I'd say the only thing I would add to that is to David's point I think there's been a little bit of a halt on our customers' requests for forgiveness, just because they are focused on their second round.
Lot of them are second focus on their second round of PPP.
And so and we would expect that probably in the latter part of the first quarter and then second quarter and then certainly third quarter would probably be the time that 90% is fully fully done.
Okay.
That's helpful and and so in terms of this in terms of the second round you highlighted.
Number of apps.
And you've taken.
And any any sense for relative to the first first round, how how much you might deploy here I think we've heard from other banks throughout earnings season net.
And the range is somewhere between 35, and <unk> and 60% of the first round balances does that feel feel about right for you all.
Well I'll give you I'll give you a couple of statistics, and then 50% is sort of and the average there and thats, probably where we feel it is if you look at it and we did 19 233 loans.
Last year, and we did $203 million.
Thus far we've accepted 500 applications and $64 million.
We think that that'll continue going but we the number that we target is probably half over the first round. So that would be you know nine.
901000 applications, maybe and maybe add.
Don't know.
And what the dollar amount or is it depends but.
That 50% is probably and.
A good a thumbnail sketch of where we think we will be.
Okay. Okay. That's helpful.
I wanted to shift to the deposits.
And the funding side of things now.
Yes.
Maybe and maybe a follow up on Alex's question and you've seen.
Just wondering if there are some opportunities to continue to remix the deposit the deposit portfolio away from Cds or time deposits.
And just kind of wanted to get a feel for if there is any level of wholesale broker type type funding in that and that deposit portfolio.
And if so what that level is.
And then in terms of kind of the rates, where where are the rates today within the transactional type deposits as well as.
And this time time deposits.
So I guess I'll kind of take it and a couple of pieces first on our CD portfolio, we have a de minimis amount of brokered Cds.
But we do have.
And we project out and we looked at and look at our CD portfolio, we do still see.
Some ability to continue to.
Price down that portfolio and what we've been experiencing is probably a 60% retention rate at a much lower rate, obviously is somewhere between five basis points and 15 basis points.
And it's coming on at and then what's happening with those funds is most of it's not leaving our bank, but going into more liquid transactional accounts savings savings and now accounts, which are.
And down into the single digits that the rates are rates are at that we're offering those products at this point.
Okay.
Yes.
And that goes along with what what what the what the margin quote unquote guidance was in terms of maybe seen from from stability here, if you're able to.
If you are able to.
Reduced.
Ending costs that's good.
Yes, yes, yes, that's right and that obviously, I'm, sorry, Brian and the other side and as our assets, obviously are continuing to re price down so we're hoping that.
Our expectations and those two will offset each other benefit on one side on the cost of funds and and.
Unfortunately, though the rates are rates are hitting us on the yields from a loan perspective, so yes.
Yes.
And I totally get it.
And then in terms of.
The criticized loans it looks like the increase was primarily just tied to the.
The two the two hotel loans that you cited and the press release and and your comments.
Yes exactly.
And we've been watching that portfolio.
It's really about the individual credits and the operators and we think these these operators probably had.
Had issues that going into the into the pandemic or probably more evident now and we feel that those are the those are the two out of our portfolio that have shown probably a longer term systemic problems and we've we've decided to put them into <unk> and the nonperforming.
Okay and.
Is there a specific reserve against those.
And those two credits at this point.
No as I commented, we have good loan to values on those and they are.
Recently appraised so their current what I would say.
Currently and the current market appraised, so those even at that level, which is certainly different than let's.
And let's say 12 months ago, we still have good value and that collateral and we don't have any specific reserves and I'd suggest one of those loans is agency guarantees and it as well which supports the credit.
And there are significant agency guarantee so.
Okay. Okay. Thank you. Thank you all for the for the for the comments and questions.
And I'll step back.
Nice attractive price. Thank you.
Ladies and gentlemen, we've reached the end of the question and answer session and I would now like to turn the call back over to President and CEO, David Nasca for closing remarks.
Alright, Thanks Omar Thank you all for participating in our teleconference. Today, we're certainly appreciative of your continued interest and support.
Please feel free to reach out to us at any time, and we look forward to talking with all of you again, when we report our first quarter 2021 results. We hope you have a great day and thanks again.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great evening.
Okay.
Okay.